Cost and Decision-Making Analysis – Cheryl Montoya Case Study Sample Solution

Breaking Even

The break-even point refers to the amount of sales where the cost of doing business is equal to business revenue. In this particular point the net business income is equal to zero. The break-even point demonstrates the point where the revenue of the sales equal the total business cost which include total fixed costs plus total variable costs. One way to compute break-even point is by use of break-even analysis method. This technique of computing breakeven point offers managers a powerful quantitative tool that can aid in decision making. In its modest form, analysis of breakeven offers an intuition on if or not the service or product revenue contains the aptitude to cover the appropriate production costs of that service or product. The information obtained from breakeven analysis can be utilized by managers to make an extensive range of decision in business, especially on setting prices, applying loans, and preparing for competitive bid. The main methods of determining the breakeven point include the graphical method, equation method, and the contribution method (Garrison, Noreen& Brewer, 2011).

In the provided case Piedmont Fasteners Corporation deals with three different forms of clothing fasteners produced at different units, variable cost per unit and sold at different prices per unit. The company also records total fixed expenses of $400000 every year. To determine the breaking even point, the equation method will be used, which is founded on the formula of cost-volume-profit (CVP) given as px = vx+ FC + profit where FC refers to the total fixed cost, p refers to price per unit, v refers to variable cost per unit, while x refers to the number of units. At breakeven the business profit is zero and in this case, the CVP formula will read as px = vx +FC (Kimmel, Weygandt& Kieso, 2009). Using spreadsheet, the provided data will be analyzed as follows:

Column1 Velcro Metal NYLON Totals
Normal Annual Sales Volume 100000 200000 400000
Unit Selling Price $1.65 $1.50 $0.85
variable Cost per Unit $1.25 $0.70 $0.25
Total variable Cost 125000 140000 100000 365000
Total Sales 165000 300000 340000 805000

In this case, the equation provided can be directly applied to determine the breakeven point since the provided data can easily assist in determining the breakeven point simply by determining the total variable cost which is provided by multiplying the total units produced per year, per product for each product and adding them together. This is given by: Velcro total variable cost = 1.25 x 100000= 125000; Metal total variable cost = 0.7 x 200000 =140000; and nylon total variable cost =0.25 x 400000 = 100000. The total variable cost incurred by the company is 365000 dollars. Thus, with application of CVP formula px = vx +FC, in this case the company will manage to breakeven at px = 365000 + 400000 = 765000 dollars. The company total annual sales are at 805000 dollars. This implies that the company will manage to meet its cost of production and make profit. At breakeven, the profit made is zero and hence the equation px = total variable cost + total fixed cost is used to give a breakeven point value of $765000. The amount above this to $805000 is the company’s profit which is equivalent to $ (805000-765000) = 40000 dollars

Question 2

According to the instruction of the total fixed cost of $400000, $20000 could be avoided in case Velcro product was dropped, $80000 could be dropped in case metal was dropped and $60000 could have been avoided, in case nylon product was dropped. The fixed cost associated with administrative cost, and rent is $240000.

This question will be solved by advancing on the CPV equation defined in question one. The px = vx + FC equation need to be solved further to obtain the value of x that is equals to the break-even point in the units of sales.; FC = px –vx; FC = x (p-v); thus x = FC/(p-v ); thus the  break-even units of sales is = x = FC/ (p – v). In this case, the total fixed cost varies per the type of the fastener being made. The administrative cost and rent fixed in each case is $240000. This will be a constant fix cost for all three products. The actual fixed cost value for each product will be determined by what other fixed cost charges are determined by the production of the product. The breakeven point units for each product will be determined as shown below.

Breakeven point for Velcro

Column1 Velcro
Fixed Cost 260000
Variable cost per unit $1.25
Unit selling price $1.65

 

x = FC/ P-v = 260000/1.65-1.25 = 260000/0.4 =650000 units which are equivalent to $1072500

Breakeven Point for Metal

Column1 Metal
Fixed Cost 320000
Variable cost per unit $0.70
Unit selling price $1.50

 

x = FC/ (p-v) = 320000/1.5-0.7 = 320000/ 0.8 = 400000 units which is equivalent to 600000 dollars

Breakeven Point for Nylon

Column1 Nylon
Fixed Cost 300000
Variable cost per unit $0.25
Unit selling price $0.85

 

x = FC /(p – v) = 300000 / (0.85-0.25) = 300000 / 0.6 = 500000 units which is equivalent to 425000 dollars

The breakeven point for the company when each product is produced alone would be 650000 units of Velcro, 40000 units of metal and 500000 units of nylon. This will be equal to 1072500 for Velcro, 600000 dollars for metal and 425000 dollars for nylon. This amount is obtained by multiplying the units needed to breakeven with the unit selling price for each product. If the Piedmont Fasteners Corporation considers producing all these units collectively per year, the breakeven point will be as follows. px = vx + FC. In this case, the fixed cost will be equivalent to 240000 + Velcro fixed cost + metal fixed cost + nylon fixed cost = 240000 + 20000 + 80000+ 60000 = 400000. Other data will be as shown by the spreadsheet below:

Column1 Velcro Metal NYLON Totals
Normal Annual Sales Volume 650000 400000 500000 1550000
Unit Selling Price $1.65 $1.50 $0.85 $4.00
variable Cost per Unit $1.25 $0.70 $0.25 $2.20
Total variable Cost 812500 280000 125000 1217500
Total Sales 1072500 600000 425000 2097500

 

The breakeven point in dollars will thus be = total variable cost + fixed cost. This is equal to; vx + FC = 1217500 + 400000 = 1617500. Thus the breakevenpoint in total dollar sale will be; px = $1617500. The company’s total sales revenue is 2097500 dollars. Thus, the recorded profit will be; profit = total revenue – breakeven point = $ (2097500- 1617500) = $480000. The company will manage a profit of $480000 in case it decide to produce the amount it needs to produce to make units of each product to match the breakeven point in case the product was produced all alone. This will cut on the fix administrative and rent cost, and hence, giving the company the advantage of bulk production, where the administrative and rent cost involved remains constant irrespective of the activity the company is involved in.

Evaluation of the Costing System of the Company

A costing system in accounting refers to the framework employed by companies to approximate the products cost for cost control, inventory valuation, and profitability analysis. Approximating the actual products cost is essential for operations profitability. A company needs to know the products that are profitable and the one that are not by accurate cost estimation. There are two forms of costing systems which include process costing and order costing. Job order costing system accumulates the costs of manufacturing separately for every job, while process costing system accumulates costs of manufacturing separately for every process. The Piedmont Fasteners Corporation is using job –order costing system where costing is based on the uniqueness of the product, which are produced in small units based on the market demand. The company keeps records of small items involved in the production which include material cost, and time involved in the development of each product. This assist in determining variable cost of every product, which varies based on the needed material and the complexity of making the product (Accounting Tools, 2017).The product cost is thus highly determined by the work involved and the cost of the material used in making one unit of these products. This is different from process costing where large standardized production is made. The company costing process involved keeping detailed records of costs of production which are attributable to unique units or units group. In this case, the company keeps detailed production records for nylon, metal and Velcro, to ensure that it is able to compute separate costs based on the material used in the production of each product, time involved in production and the complexity of production. Thus, the cost varies as per the specific product that was being produced.

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